Everest Indemnity v. Rea (CA1 1/15/15)

The question is whether an insurance company, by defending a bad-faith claim on the grounds of subjective good faith, waives the attorney-client privilege.

The opinion says almost nothing about the facts but it appears that Everest issued a liability policy and then used up its limits settling some but not all of multiple claims, whereupon the disappointed claimants arranged a bad-faith action. Everest, which had consulted with counsel during the settlement process, defended on the grounds of both objective and subjective good faith. The plaintiffs sought production of the lawyers’ communications, arguing that they were relevant to subjective bad faith (apparently acknowledging that Lee (2000) foreclosed waiver claims on the objective side). The trial court ordered production; Everest took special action; the Court of Appeals accepts it and reverses, though there is a dissent.

The court starts by citing Lee for the proposition that merely consulting with a lawyer doesn’t waive the privilege. But “waiver is implied when . . . a party makes an affirmative assertion that it was acting in good faith because it relied on counsel’s advice to inform its own interpretation and evaluation of the law.” The plaintiffs countered with Mendoza (2009), in which the insurer had substantially relied on lawyers to make decisions about how to handle a workers comp claim; that court, mostly in the context of subjective bad faith, allowed discovery of the lawyers’ advice. The court says that the argument “overreads” Mendoza. “To waive the attorney client privilege, a party must make an affirmative claim that its conduct was based on its understanding of the advice of counsel”; merely getting the advice isn’t enough.

“Everest has not asserted as a defense, at least not yet, that it depended on advice of counsel in forming its subjective beliefs regarding the appropriate course of conduct. Similarly, Everest has not yet seen the need to share the advice of its counsel with its own expert — the expert simply cites the fact of consultation as a procedural indication of good faith. As such, Everest has not yet placed the advice it received from counsel at issue in this litigation.” So the court reverses and remands.

The dissent essentially agrees with the majority’s reading of Mendoza. But it points out that Everest’s lawyers also participated in the negotiations to settle the claims that it resolved. “Counsel’s participation, along with Everest’s assertion of subjective good faith, is an affirmative interjection of counsel’s role in formulating and acting upon Everest’s subjective good faith in this litigation.”

We think we can figure out the intended meaning of that sentence, though as written it doesn’t have any. The dissent argues against a “mechanical” application of Lee by which the privilege isn’t waived until the insurer formally takes a particular position; the judge says it “depends on the facts” and feels that counsel’s participation in settlement raises enough of a question to warrant discovery.

Despite the dissent’s acceptance of the majority’s legal analysis, its hard to reconcile some of the language this case with that in Mendoza. One of them “overreads” Lee.

Otherwise this is not a bad little opinion (though the majority opinion is a bit oddly organized). Which is to say that we’re not complaining when we wonder why the majority, while mentioning almost no relevant facts, chose to point out an obscure and irrelevant one: that the policy was an OCIP.

(link to opinion)